TRADE
POLICY REVIEWS: FIRST PRESS RELEASE, SECRETARIAT AND GOVERNMENT SUMMARIESTurkey: October 1998

Turkey's far-reaching structural and legislative reforms,
undertaken within the framework of the customs union with the European Union, have led to
improved market access and a more secure trading environment for all investors and
traders.

Turkey's
trade agreement with the EU leads to improved business environment for all foreign
investors and traders Back to top

Turkey's far-reaching structural and legislative
reforms, undertaken within the framework of the customs union with the European Union,
have led to improved market access and a more secure trading environment for all investors
and traders. According to a new WTO Secretariat report on Turkey's trade policies and
practices, these reforms are expected to yield significant economic benefits. The
commitments undertaken in the agreement with the EU go well beyond the basic requirements
of a custom union, as well as Turkey's obligations in the Uruguay Round.

The new WTO Secretariat report and a policy
statement prepared by the government of Turkey will provide the basis for a review of
Turkey's trade policies and practices on 12 and 13 October 1998.

Since the Turkey-EU customs union entered into force
on 1 January 1996, Turkey has adopted the EU common external tariff on most industrial
imports and on the industrial component of processed agricultural goods. In addition,
import surcharges have been virtually eliminated, thereby simplifying the calculation of
taxes payable on imports. As a result of these policies, the average tariff has been cut
from 27% in 1993 to 13% in 1998. Turkey has also harmonized much of its legislation with
that of the EU in the areas of customs provision, duty concessions, officially supported
export credits, competition policy, state aid, intellectual property rights, standards,
and sanitary and phytosanitary measures.

The report states, however, that the customs union
also obliged Turkey to introduce some new external trade measures to achieve harmonization
with those of the EU, particularly concerning the adoption of the EU textile and clothing
regime. This measure is currently subject to a challenge by India under WTO dispute
procedures. A number of goods such as certain telecommunications equipment, machinery,
motor vehicles and chemicals remain subject to prior import licensing.

According to the report, imports into Turkey from
the EU increased from US$17 billion in 1995 to US$25 billion 1997, amounting to about half
of Turkey's imports. The report states, however, that exports to the EU increased only
marginally, as most manufactured exports have been traded duty-free since the early 1970s
and agriculture is yet to be liberalized. While there may be concern about possible trade
diversion resulting from the customs union, the report notes that third countries should
altogether benefit from the alignment of Turkey's tariffs with those of the EU and that
reforms are improving the business environment for all foreign investors and traders.

The report notes that agriculture, largely excluded
from the customs union, continues to be subject to extensive and costly government
intervention. It points out important policy imbalances between manufacturing and
agriculture and states that while the manufacturing sector has experienced substantial
liberalization, transfers to the already heavily supported agricultural sector have
increased. According to OECD estimates, total transfers to agriculture almost doubled in
the period 1994 to 1997, reaching the equivalent of 7.5% of GDP. With the increase of the
MFN tariff from 35% in 1993 to 43% in 1998, tariff protection in the agriculture sector
constitutes a significant barrier to imports. In contrast, Turkey's average MFN tariff on
imports of manufactures more than halved during the same period from 27% to 12%.

The report observes that the overall economic
situation remains fragile in Turkey, mainly because of the slow progress in the
implementation of key structural reforms. Turkey suffers from high fiscal deficits and
high inflation. The costly social security system needs to be restructured along with the
banking sector which suffers from a number of weaknesses, such as preferential lending to
favoured sectors, weak supervision and accounting standards, and cross-ownership. While
the Turkish government passed a comprehensive law on privatization in 1994, the report
notes that implementation has been slow. Privatization of dominant state economic
enterprises in areas such as air transport and basic telecommunications has been initiated
but has yet to be completed.

Several service sectors are beginning to open up but
in certain sectors, particularly finance and banking, investors still require special
government approval before being allowed to enter the market. Turkey did, however,
undertake commitments in each of the three major negotiations concluded in the WTO in
1997, mainly the information technology agreement and the financial and telecommunications
services agreements.

The report concludes that while Turkey's overall
economic performance is strong, the efficiency of the economy would benefit from the
privatization of state economic enterprises and a reform of the financial sector. Changes
induced by the customs union, however, are expected to have significant economic benefits,
especially in terms of restructuring and modernization of the manufacturing sectors. Other
countries should also benefit from the market-opening in manufactures and greater security
in the trade regime and business environment. However, the current trend of increasing
support in agriculture is contrary to the liberalization seen elsewhere in the economy.
This sectoral imbalance, states the report, could be a tax not just on consumer welfare
but also implicitly on manufacturing and services that compete with agriculture for
production factors.

Notes to Editors

The WTO's Secretariat report, together with a policy
statement prepared by the Turkish Government, will be discussed by the WTO Trade Policy
Review Body (TPRB) on 12 and 13 October 1998. The WTO's TPRB conducts a collective
evaluation of the full range of trade policies and practices of each WTO member at regular
periodic intervals and monitors significant trends and developments which may have an
impact on the global trading system. The Secretariat report covers the development of all
aspects of each of Turkey's trade policies, including domestic laws and regulations, the
institutional framework, trade policies by measure and by sector. Since the WTO came into
force, the new "areas" of services and trade-related aspects of intellectual
property rights are also covered.

To this press release are attached the summary
observations from the Secretariat report and the full government policy statement. The
full Secretariat report is available for journalists from the WTO Secretariat on request
(call 41 22 739 5019). It is also available for the press in the newsroom of the WTO
internet site (www.wto.org). The Secretariat report, together with the government policy
statement, a report of the TPRB's discussion and the Chairman's summing up, will be
published in hardback in due course and will be available from the WTO Secretariat, Centre
William Rappard, 154 rue de Lausanne, 1211 Geneva 21.

Since the previous Trade Policy Review in 1994,
Turkey has implemented a wide range of reforms within the framework of the customs union
between Turkey and the EU, taking it significantly beyond its Uruguay Round commitments as
well as generating improved and more secure trading opportunities for third countries. In
addition to halving its manufacturing tariffs to the levels of the EU common external
tariff (CET), Turkey has also harmonized much of its legislation with that of the EU in
areas such as competition policy, customs provisions, intellectual property rights and
standards. While the Customs Union Decision (CUD) has clearly resulted in an overall
liberalization, some new trade measures were introduced as a result of the customs union
(quantitative restrictions on textiles and clothing, and tariff quotas). Another area of
concern is the policy imbalance between manufacturing and agriculture: over the past four
years, the manufacturing sector has experienced substantial liberalization while transfers
to the already heavily supported agricultural sector have increased. In addition,
macroeconomic imbalances (high fiscal deficits and inflation) and slow progress in the
implementation of key structural reforms (including in the social security system, the
privatization programme and in banking) may threaten the sustainability of Turkey's
strong, but variable, growth performance.

Economic Environment

In 1994, the Turkish economy experienced a severe
recession, following growth of 8% in 1993. A severe budget deficit and real currency
appreciation triggered a financial and foreign exchange crisis at the beginning of 1994,
leading to a contraction of 6% in GNP for the year. However, the economy quickly
recovered, aided by the customs union between Turkey and the EU and deregulation in
general: annual average growth between 1995 and 1997 was 7.7%.

Over the same period, the current account deficit
widened somewhat but was generally kept at a manageable level. Gross international
reserves accumulated to a record high of nearly five months of merchandise imports and the
real exchange rate remained relatively stable.

Historically, expenditures on state economic
enterprises were a major source of Turkey's fiscal imbalances. These have largely been
brought under control; however, social security spending and interest payments have now
become major causes of the deficit. In the past, monetization of deficits contributed to
high inflation, but the new Banking Act has greatly limited the Central Bank's ability to
do so. The Government has, instead, resorted to domestic borrowing on the open market. As
a result, the public sector borrowing requirement almost doubled between 1995 and 1997,
reaching 8% of GNP. This has driven up real interest rates, threatening to crowd out
private investment.

Despite the recovery, the overall economic situation
remains fragile, particularly in respect of price inflation. Macroeconomic imbalances and
slow progress in the implementation of key structural reforms (including in the social
security system, the privatization programme, and banking) may threaten the sustainability
of the strong growth performance.

Developments in Turkey's Trade Policy Regime

Far-reaching structural and legislative reforms have
been undertaken by Turkey in connection with its customs union with the European Union.
Exposure to foreign competition has increased as trade barriers have been lowered on an
MFN basis, and many trade-related reforms have been implemented while others are in the
pipeline. Examples include the adoption of new legislation protecting intellectual
property rights and the establishment of a competition authority. Over the past four
years, Turkey has also enacted a comprehensive law on privatization and simplified its
already relatively liberal foreign direct investment regime. However, the restructuring of
the costly social security system, the implementation of the privatization programme and
reform of the banking sector are areas where much remains to be done.

Within the framework of the Customs Union Decision
(CUD), which entered into force in January 1996, Turkey has eliminated tariffs on
manufactured imports originating in the EU, adopted the EU common external tariff (CET)
for manufactures and the industrial component of processed agricultural products, and is
progressively aligning itself to the EU's preferential trade regime, as required. The CUD
goes well beyond the basic requirements of a customs union; in the context of the
Decision, Turkey has enacted a wide range of trade and trade-related legislation, seeking
to apply many elements of the "acquis communautaire" in the areas of customs
provisions, duty concessions, officially supported export credits, competition policy,
state aid, intellectual property rights, standards, and sanitary and phytosanitary
measures. Turkey has until 2001 to implement the CUD fully.

Generally, the adoption of the CUD has improved
market access conditions for third countries to most sectors of the Turkish market, and
the implementation of many of the trade-related reforms will improve the business
environment for foreign investors and traders. The Decision, however, has also obliged
Turkey to introduce some new external trade measures to achieve harmonization with those
of the EU. For example, the adoption of the EU textile and clothing regime was designed to
close the bridge to the EU market that would otherwise be opened under the CUD; this
measure is currently subject to a challenge by India under WTO dispute procedures. Turkey
itself is a major exporter and very limited importer of textiles and clothing. Turkey has
also introduced tariff quotas on some agricultural and processed agricultural products in
the framework of some of its recently signed free-trade agreements; these include
agreements with the Baltic States (Estonia, Latvia and Lithuania), several Eastern
European countries (Bulgaria, Czech Republic, Hungary, Romania, Slovak Republic and
Slovenia) and Israel.

As bilateral barriers have been lifted, trade
between Turkey and the EU has grown. Imports from the EU increased from US$17 billion in
1995 to US$25 billion in 1997, amounting to about half of Turkey's imports. However,
exports to the EU increased only marginally, as most manufactured exports have been traded
duty-free since the early 1970s and agriculture is yet to be liberalized. While there may
be concern about trade diversion, third countries should generally benefit from the
alignment of Turkey's tariffs with the EU CET. Since 1 January 1996, Turkey has been
applying the same rules of origin as the EU with respect to imports from third countries,
in terms of both preferential and non-preferential rules.

In most areas, Turkey's commitments towards the EU
involve obligations exceeding those of the WTO Agreements. However, some legislative
changes introduced since the previous Review have also been induced by WTO commitments
including on trade-related aspects of intellectual property rights (TRIPS) and safeguards.
As a result of the Uruguay Round, the share of bound tariff lines increased from 31 to
46%, with all agricultural lines bound. While nominal bindings in industry are generally
well above applied rates, the CUD obliges Turkey not to impose higher tariffs than the EU
common external tariff (except in areas where the CUD does not apply, mainly in
agriculture) with the consequence that Turkey's tariff is, in practical terms, bound at EU
rates. Turkey also made extensive commitments under the General Agreement on Trade in
Services (GATS); its schedule covers 72 activities out of a total of 161 in nine sectors.
Since then, Turkey has become a party to the 1995 Interim Agreement on Financial Services,
the 1997 Agreement on Telecommunications Services, the 1997 Information Technology
Agreement (ITA), and the 1997 Agreement on Financial Services. Turkey ceased to apply
Article XVIII:B ("balance-of-payments" article) of GATT in 1997.

Specific Trade and Trade-Related Measures

Tariff and non-tariff border measures

Since the previous Trade Policy Review in 1994,
Turkey has further opened its economy to foreign competition. The Mass Housing Fund (MHF)
levy has been virtually eliminated, thus simplifying taxes payable on imports and
improving transparency. In 1998 the levy covered 3% of the tariff lines, compared with 87%
in 1993. In addition, in January 1996, Turkey adopted the EU common external tariff (CET)
on most industrial imports (except for 290 "sensitive" items at the twelve-digit
level on which tariffs will remain above the CET until 1 January 2001) and on the
industrial component of processed agricultural goods. As a result of these actions, the
average level of border taxation (including the MHF) was cut by more than half from 27% in
1993 to 13% in 1998. On the other hand, substantial tariff dispersion continues to exist
and there is a large number of tariff rates (242 distinct rates, excluding ad valorem
equivalents) with the greatest variations seen in agriculture.

Turkey ranks sixth among WTO Members for the number
of final anti-dumping measures imposed between 1989 and 1996; however, the number of new
cases initiated has declined in recent years and no new final measures have been
introduced since 1995. Turkey is not obliged under the CUD to adopt the EU's anti-dumping
measures, and the two parties retain their mutual rights in this area. Import certificates
were abolished in 1996, but a number of goods remain subject to prior import licensing,
partly related to the enforcement of standards. Examples include certain
telecommunications equipment, machinery, motor vehicles, transmission apparatus, chemicals
and civil aircraft related products.

Turkey has eliminated many of its export incentive
programmes, including the energy incentive (providing discounted prices on electricity,
natural gas and liquified petroleum consumed in the production of exported products); free
wheat (supply of wheat without payment to certain companies subject to export
performance); and the transportation subsidy (for exports of some agricultural products).
Instead, Turkey now relies on a wide range of indirect measures, including duty
concessions and preferential credit allocation to exporters. Within the framework of the
CUD, the OECD Consensus principles on officially supported export credits with a repayment
term of two or more years have been adopted. Nevertheless, the Turk Eximbank incurs
substantial negative net operating cash flows associated with its export and credit
guarantee programmes. Since Turkey's previous review, the number of items prohibited for
exports, by broad categories, has increased from seven to 14, while the items affected by
export taxes has fallen from seven to two (hazelnuts and semi-processed leather).

Internal measures

Turkey's state-aid system of tax exemptions and
concessional credit is complex, non-transparent and generous, amounting to 7.5% of GDP in
agriculture alone. The wide range of factors determining the value of incentives poses
difficulties in evaluating the impact of the schemes. Studies have emphasized the
distortionary resource allocation effect of these measures.

State economic enterprises increased their share of
GDP (at constant prices) from 8% in 1991 to 11% in 1994 (latest available data), but
evidence suggests that this role may have diminished since then. Moreover, the financial
position of the enterprises has improved, largely because of the adoption of more
realistic, market-based pricing policies. Nevertheless, the demarcation between the
private and the public sector is not always clearly defined. In this regard, the
comprehensive privatization law of 1994 provides a framework for progress, but the
privatization process has so far been slow and marred by legal disputes.

The private sector environment has improved with the
enactment of a modern and comprehensive legal framework in the area of intellectual
property and the establishment of a competition board. However, enforcement capacity is
lagging behind the legislative progress.

Sectoral policies

Since Turkey's previous Review, the already heavily
supported agricultural sector has received increased assistance, while the manufacturing
sector has opened up to foreign competition through lower border protection.

The agriculture sector accounts for 14% of GDP and
employs about half of the labour force. The sector, which is largely excluded from the
customs union, continues to be subject to extensive and costly government intervention.
Support to the sector has increased in recent years. According to OECD estimates, total
transfers (expressed in U.S. dollars) almost doubled in the period 1994 to 1997, reaching
the equivalent of 7.5% of GDP. Support price interventions and the fertilizer subsidy
continue to be serious drains on the budget.

Tariff protection in the agriculture sector
constitutes a significant barrier to imports, and has increased since the previous review;
using the Uruguay Round definition, the average MFN tariff increased from 35% in 1993 to
43% in 1998. The food, beverage and tobacco subsectors are also characterized by strong
tariff escalation, thereby maintaining higher levels of effective protection than is
evident from the nominal rates. A ban on imports of live animals and meat has been in
force since May 1996 to prevent the expansion of epidemic diseases (including bovine
spongiform encephalopathy (BSE)).

While agriculture (other than the industrial element
of processed items) is excluded from the customs union agreement, Turkey undertook
important agricultural commitments in the Uruguay Round. All agricultural tariff lines
were bound at levels equal to or above the sum of applied MFN rates and MHF levies. Unlike
many WTO Members, however, Turkey did not undertake any "tariffication" for
agricultural products. Turkey also undertook to reduce its budgetary outlays for export
subsidies for 46 products by 24% and the volume of subsidized exports by 14%, in equal
instalments over a ten-year period starting in 1995. However, it made no commitment to
cutting financial support for agricultural producers, as the level of support computed by
the Government was below the de minimis level of 10%.

As a result of the customs union and the phasing out
of the MHF, Turkey's average MFN tariff on imports of manufactures (ISIC 3) more than
halved from 27% in 1993 to 12% in 1998. Excluding food, beverages and tobacco
manufacturing (ISIC 31), the average MFN rate for manufactures dropped from 25% to 5.5%
over the same period. Trade between the EU and Turkey, with a few exceptions, is duty
free. In the automobile sector, foreign investors have accepted as a "gentlemen's
agreement", without any legal obligation, to incorporate a certain share of local
content.

State economic enterprises dominate the energy
sector (some 90% of the market is state-owned) and many prices are influenced by
Government policies. In order to improve the functioning of the sector and to meet the
projected energy demand, the sector is a primary target for privatization.

However, progress has so far been slow, with court
rulings overturning many decisions.

Since the previous review, several services areas
are beginning to open up. However, investors in certain sectors, particularly finance and
banking, require special government approval before setting up business. Privatization of
dominant state economic enterprises in areas such as air transport and basic
telecommunications was initiated with the enactment of the 1994 law on privatization, but,
as with other sectors, progress has been slow. Five ports have so far been transferred to
the private sector, while the main ports are owned and operated by state economic
enterprises.

The banking sector suffers from a number of
weaknesses. Preferential lending to favoured sectors, which accounts for about half of the
loans to the state banks, not only introduces distortions but also has a high direct
financial cost. Supervision and accounting standards need to be strengthened, while
cross-ownership between banks and industrial companies may also imply that market
principles for extending credits are not fully applied.

Outlook

While Turkey's overall economic performance is
strong, the budget deficit continues to be a drag on the economy, causing high inflation
and elevated real interest rates to the detriment of private investment. Moreover, the
slow progress in the implementation of key structural reforms, such as reform of the
social security system, may hinder improvement of the fiscal position. The efficiency of
the economy would also benefit from moving ahead with the privatization of state economic
enterprises and reform of the financial sector.

The reforms induced by the customs union between EU
and Turkey are expected to have significant economic benefits, especially in terms of
restructuring and modernization of the manufacturing sector; by and large, other countries
should also benefit from the market-opening in manufactures and greater security in the
trade regime and business environment. However, the agreement with the EU does not cover
agricultural products, and the current trend of increasing support in this sector is
contrary to the liberalization seen elsewhere in the economy. This sectoral imbalance
could be a tax not just on consumer welfare but also implicitly on manufacturing and
services that compete with agriculture for production factors.

The past decades have witnessed a significant
transformation of the Turkish economy, from a highly protected state-directed system to a
market-oriented free enterprise system. During the 1970s Turkey concentrated on domestic
growth fuelled by foreign borrowing, which culminated in a period of financial distress
and a rescheduling of its external debt. Reforms initiated since 1980 have, among other
things, largely removed price controls and reduced subsidies; reduced the role of the
public sector in the economy; emphasized growth in the industrial and service sectors;
encouraged private investment and savings; liberalized foreign trade, reduced tariffs and
promoted export growth; eased capital transfer and exchange controls and encouraged
foreign investment; strengthened the independence of the Central Bank and moved to full
convertibility of the Turkish Lira; and reformed the tax system.

The Turkish economy has responded well to these
reforms. Turkeys real GNP growth rate averaged 5.5% during the period from 1984
through 1993. In particular, the industrial base has been significantly broadened, and
exports of goods and services have grown rapidly. Financial markets have become broader
and more sophisticated. Although Turkeys external debt in relation to GNP increased
from 1991 through 1994, Turkey continued to service its external debt.

These reforms contributed significantly to the
dynamism of private sector and underpinned the flexibility of Turkish economy to adapt to
both internal and external shocks. These have been reflected also by the strong growth
performance of Turkish economy in the last decade despite some years of unfavorable
international environment and internal imbalances.

The principal source of economic growth during the
1980s and 1990s was the expansion of exports, which increased at an average of 4.41% per
annum during the period from 1988 to 1995. A key contributor to GNP growth during this
period was fixed investment, which rose 78.2% per annum on average during the period from
1988 to 1995.

Real GNP growth returned to higher levels in 1992
and 1993, with real GNP growing at a rate of 6.4% in 1992 and 8.1% in 1993. The economic
growth was attributable in part to private sector consumption (due to increases in real
wages and agricultural income in previous year, the increased use of consumer credit and
lower effective import prices) and private investment (due to strong domestic demand and
increased industrial capacity utilization rates, among others).

In 1994, due to the foreign exchange crisis and the
Stabilization Program (see Section (ii) below), real GNP declined by 6.1%. In 1995, real
GNP grew by 8.0%. The increase in GNP is mainly attributable to the growth in industry and
trade sectors which grew by 12.1% and 11.6%, respectively, in 1995. Capacity utilization
ratios and industrial production data indicate that the economic growth continued in 1996
and GNP growth was better than expected at 7.4% for 1996. This growth was largely due to
an increase in domestic demand, particularly in consumer durables and automobile sales.

Real GNP growth registered as 8% for 1997 as a
whole. In 1997, the value added in agricultural sector declined by 2.0% whereas industrial
and service sectors grew by 10.0% and 8.0%, respectively. The high growth of industrial
sector mainly stemmed from the rise in private sector manufacturing production which
increased by 14.2%. The governments initial economic program forecasts 3% real
economic growth in 1998, compared to 8% in 1997.

Stabilization Program and Aftermath

The combination of high public sector deficits, a
high current account deficit and a sharp increase in external indebtedness led to a
serious financial crisis in the beginning of 1994. The results were a marked increase in
domestic borrowing rates and a sharp depreciation of the Turkish Lira against major
currencies. The sharp depreciation of the Turkish Lira also adversely effected the banking
sector.

On 5 April 1994, the Government announced the
"Stabilization Program", designed to achieve a comprehensive macroeconomic
stabilization and structural reform and to reduce the macroeconomic imbalances in the
economy and re-establish the conditions for sustainable growth.

In particular, the Stabilization Program aimed to
reduce the rate of inflation, improve the external balance and restore stability to the
foreign exchange market. The core of the Stabilization Program consisted of measures to
reduce the public sector deficit, supported by a restrained monetary and credit policy.

Efforts to restrain public expenditure and boost tax
receipts were supported by structural reforms which included privatization, tax reform, a
change in agricultural support policy and structural reforms in banking sector. In
addition, the Government initiated consultation meetings with the IMF and the new
macroeconomic program was supported by an IMF stand-by-programme designed to reduce the
macroeconomic imbalances in the economy.

Implementation of the Stabilization Program has been
broadly successful. Recovery in Turkeys external balances was better than envisaged
with the current account swinging into surplus in 1994. In addition, official foreign
currency reserves increased and exceeded pre-crisis levels, the public sector borrowing
requirement (PSBR) was reduced from 12.2% of GNP in 1993 to 8.1% of GNP in 1994 and
stability in the foreign exchange market was restored.

The improvement in the public deficit mainly derived
from the consolidated budget. The ratio of consolidated budget deficit to GNP declined
from 6.7% in 1993 to 3.9% in 1994. The main obstacle to a further reduction in the budget
deficit was high domestic interest payments. This is indicated by the improvement in the
non-interest budget balance from a deficit of 0.6% of GNP in 1993 to a surplus of 3.8% of
GNP in 1994.

In the external sector, the 1994 recovery was better
than forecast. Exports, which had stagnated in the first five months of 1994, began to
increase as a result of the trade weighted effective real exchange rate for Turkish Lira
having depreciated, thus making Turkish exports much more competitive, and improving the
macroeconomic environment in general. The increase in exports, combined with a decline in
imports due to economic recession, resulted in a substantial decline in the trade deficit
from U.S. Dollars 14.2 billion in 1993 to U.S. Dollars 4.2 billion in 1994. Parallel to
this development, the current account balance recorded a surplus of U.S. Dollars 2.6
billion in 1994, in contrast to current account deficit of U.S. Dollars 6.4 billion in
1993.

Stability in the foreign exchange rate was one of
the main targets of the Stabilization Program and the rapid depreciation and wide exchange
rate fluctuations experienced in the first four months of 1994 slowed substantially from
the end of April 1994. The exchange rate with the U.S. dollar, which had depreciated by
131% during the first four months of 1994, depreciated by only 16% during the remainder of
the year.

However, the inflation resulting under the
Stabilization Program was disappointing and contraction in the real economy was sharper
than envisaged. The monthly rate of inflation, which declined sharply after the price
adjustments of April 1994, began to rise again from September. The annual rates of
inflation, reflected in the wholesale price index (WPI) and the consumer price index
(CPI), were 149.6% and 125,5%, respectively, in December 1994. Rapid reserve accumulation
due to strong recovery in the external sector led to an increase in liquidity and caused
aggregate demand to increase in nominal terms.

The surge in exports was also a factor that
contributed to the increase in aggregate demand. On the supply side, a sharp decline in
industrial production and a poor harvest caused aggregate supply to decline. As a result,
inflationary pressure in the economy increased, causing inflation to rise despite
substantial fiscal restraint.

It was inevitable that the austerity measures would
cause economic activity to decline. Although GNP increased by 3.5% in the first quarter of
1994, this was due to in part to a continuation of the high growth rate of the previous
year, as stated GNP declined by 6.1% in real terms overall in 1994.

In order to address the underlying causes of
macroeconomic imbalances and to ensure the sustainability of growth in a stable
environment, various structural measures were taken in 1994, including the enactment of a
new privatization law in November 1994. Cash proceeds from privatization in 1994 including
collections of instalments from the previous year were U.S. Dollars 565 million.

Under these circumstances, the economy entered 1995
with a more stable picture in both the financial and real sectors. A major aim of monetary
policy in 1995 was to reduce inflation but allow sufficient room for economic recovery.
Tight fiscal and monetary policies have initially been continued to be pursued. These
policies were intended to cause the WPI to fall from its level of 149.6% in year-on-year
terms at the end of 1994, and by the end of 1995 WPI had realized as 64.9%.

As far as the 1995 figures are concerned, GNP grew
by 8.0%, the industry sector increased by 12.1%, the services sector grew by 6.4% and the
agricultural sector grew by 2.6%.

In 1996, the Turkish economy grew far more than
expected. The growth rate highly exceeded the official target of 4.5% and equaled to 7.1%.
The expected growth rate was relatively lower mainly due to two factors. First, it was
opposed that the introduction of the Customs Union with the EU would slow down the growth
rate by means of increasing competitive imports. Second and more importantly, general
elections at the end of 1995 increased the possibility of putting the long-awaited
stabilization policies into effect via a new Government. However, though competitive
imports in general, and consumer goods imports in particular, showed a remarkable
increase, the real growth rate remained high.

In 1996, the GNP increased by 7.1%. Regarding the
sub-sectors, trade was the best performing sector with a growth rate of 8.9%. The
transportation sector followed the trade sector with a growth rate of 7.6%. The industrial
sector grew by 7.1% whereas the agricultural sector went up by 4.4%. On a year-on year
basis, consumer price inflation was 79.8% at the end of 1996 and wholesale price inflation
was 84.9%.

Industrial output showed an increase of 7.1% in 1996
over 1995. The trade deficit increased from U.S. Dollars 13.2 billion in 1995 to U.S.
Dollars 18.5 billion in 1996. Besides, when the adjustment for shuttle trade is added to
the foreign trade figures, the current account deficit declines to U.S. Dollars 1.8
billion for 1996. However, the current account deficit rose to 2.4 billion dollars in 1997
as a result of sharp decline in shuttle trade.

In 1997, the budget was prepared as a balanced
budget based on the expected revenues from "resource packages". Revenues were
targeted to increase by 6.8 percentage points over 1996 and reach 24.7% of GNP.
Expenditures on the other hand were budgeted to decline by 2.0 percentage points to 24.7%
of GNP mainly due to the sharp drop in interest expenditures. However, expected revenues
from resource packages fell significantly short of the targets, while non-interest
expenditures rose sharply during the first half of the year. Hence, an additional budget
was approved by the Parliament. The bulk of the additional budget was allocated to the
personnel expenditures, social security transfers, interest payments, and state
participation to public banks and payments for duty losses.

During the preparation of 1998 Budget in October
1997, budget deficit was estimated to be 2.625 trillion TL for 1997 as a whole
representing 9.0% of GNP. However, thanks to the strong performance of tax revenues in the
last quarter and control in investment expenditures and non-interest transfers, budget
deficit for 1997 was realized lower than projected in early October. Budget deficit for
1997 was realized as 2.232 trillion TL representing 7.5% of GNP. Primary balance, on the
other hand, yielded a surplus of 0.2% of GNP.

In the last years, despite the significant gains in
GNP growth and the establishment of an outward oriented economic structure, progress in
fiscal consolidation and in controlling inflation fell short of the targets.

Growing public sector deficit became the major
concern on the agenda and remained to be the main problem facing the economy. As stated
below, PSBR/GNP ratio fell to 7.9% in 1994 and further to 5.2% in 1995. Fiscal stance
became moderately expansionary in the last quarter of 1995 before the early election and
public sector borrowing requirement rose by 3.8 percentage points over 1995 and reached
9.0% in 1996 and stood around 8.2% in 1997.

The increasing pressure of the public sector on the
financial system and the rise of interest rates led to the shortening of the term
structure and persistence of inflationary expectations.

In sum, the macroeconomic performance of the Turkish
economy in recent years can be best described as strong output growth backed with fiscal
expansion and an accommodating monetary policy. In this process, price increases tended to
accelerate significantly, while primary public balance turned into a deficit in 1997
following the surpluses in 1995 and 1996.

Taking into account these unsustainable developments
the government formed in June 1997 has decided to embark upon a three year structural
adjustment and stabilization program beginning from 1998. The primary objective of the
medium-term program is to pave the way for a "catching up" period to narrow
income and productivity differentials with our partners and to set a sound basis for an
healthy integration with EU countries. To this end, macroeconomic stability needs to be
restored and a structural change is to be achieved.

In the way to achieve macroeconomic stability, the
major challenge is to bring fiscal deficit onto a sustainable basis in the next few years.
The program attributes great importance to maintain a primary budget surplus for a
sustained reduction in inflation.

Within the medium term program it is targeted that
GNP growth will be around its long run growth rate of 4.0% on average during 1998-2000.
Fiscal adjustment will continue to maintain a surplus of 4% of GNP and at the end of the
program budget deficit-GNP ratio is estimated to decline to 2.1%. This fiscal adjustment
coupled with forward indexation of wages and salaries is expected to lower inflation rate
to single digit levels at 2000.

In this context, Turkey has signed a staff monitored
program with IMF and announced in June 1998. The program will last for 18 months and be
monitored by IMF staff on a quarterly basis. The aim of the program is to provide support
for the Turkish Government in decreasing inflation rate to the target levels of the medium
term program.

TRADE POLICIES-DYNAMICS OF TRADE POLICIES

Turkey has strongly been committed to following the
path to free trade with rest of the world. In this line, two main factors greatly
contributed to pursue a liberal foreign trade system based on the principles of free and
fair competition, non-discrimination and elimination of barriers to trade. The first is
the obligations to be fulfilled under the World Trade Organization and the second is the
relations with the European Union aiming at full membership of Turkey.

It is interesting to note that the completion of the
Customs Union between the European Union and Turkey had been realized in the same period
as the commencement of the implementation of the Uruguay Round outcomes and the
establishment of World Trade Organization.

Within the wider WTO framework, the Customs Union
has been continuing to be the main determinant formulating foreign trade policies of
Turkey. The steps that Turkey has taken, or will take, in compliance with its commitments
for the proper functioning of the Customs Union are parallel to its commitments vis-à-vis
the World Trade Organization. This situation certainly facilitates Turkeys
implementation of the provisions of the Uruguay Round Final Act.

In this respect, Turkey has been implementing the
provisions of the Final Act without encountering serious difficulties since they closely
follow the EU legislation.

On the other hand, in order to meet its commitment
of harmonizing its trade regime in line with that of EU, Turkey has signed free trade
agreements with many countries and negotiations with some other are continuing.

The regional trade arrangements are other factors
which occupy significant place in the formation of Turkeys trade relations.
Considering them as complementary elements to the multilateral trading system, Turkey has
followed active policies in promoting regional co-operation schemes in adjacent regions.
The Black Sea Economic Cooperation, recently turned into a regional economic organization
in June 1998, and the Economic Cooperation Organization (ECO) illustrates the intention of
Turkey in this direction.

Owing to its unique geographical position which
makes it a country with European, Middle Eastern, Balkan, Caucasian, Mediterranean and
Black Sea identities, Turkey is obliged to have a wide spectrum of bilateral economic
relations with countries from all over the world in different fora. In this regard, Turkey
has established a solid economic basis for stable and fruitful cooperation with many
countries, especially with her neighbours through bilateral trade and economic agreements.

Uruguay Round and WTO Implementation

Turkey acceded to the GATT in 1951 under the Torquay
Protocol as a developing country and has participated in all rounds of multilateral trade
negotiations actively including the Uruguay Round With the single undertaking signed in
Marrakesh on 15 April 1994, Turkey became an original Member of WTO on 26 March 1995 and
bound by the obligations of all Uruguay Round Agreements excluding the Plurilateral
Agreements

In this regard, Turkey has assumed new rights and
fulfilled its obligations both in areas covered by GATT disciplines and in new areas such
as Agreement on Trade in Services, TRIPS and TRIMs.

Industry

In her Uruguay Round list for the industrial goods,
Turkey provided 29% tariff reduction in compliance with the Marrakesh Protocol. But apart
from this commitment, Turkey, with formation of a customs union with the EU in 1996,
adopted the EUs Common Customs Tariff against imports from third countries. Thus,
Turkey provided one of the most generous reductions with respect to average rate of
protection applicable in 1986, which is the date when the negotiations were launched (see
Chapter II(2)).

On the other hand, in compliance with the Textiles
and Clothing Agreement, at the beginning of the second phase, on 1 January 1998, Turkey
has integrated the products which accounted for 18,03% of total volume of her imports of
1990. Furthermore, the products in category 124 have been integrated into the GATT on 1
January 1998. It represents 29.07% of 1990 imports into Turkey by volume.

Information Technology Products

As one of the participant countries to The
Ministerial Declaration on Trade in Information Technology Products (ITA) which was signed
on 13 December 1996 in Singapore at the conclusion of the first WTO Ministerial
Conference, Turkey committed to phase out customs duties on information technology
products as of 1 January 2000.

In compliance with this commitment the first two
stages of reduction were put into force due to the completion of domestic procedural
requirements and appended to the 1998 Import Regime as of 1 January 1998.

Since then, Turkey actively participated to the
works carried out within the framework of Committee of Participants on the Expansion of
Trade in Information Technology Products (ITA Committee).

Agriculture

In accordance with the Agreement on Agriculture,
Turkey bound 100% of duties on agricultural products and undertook to reduce the
agricultural tariffs by 24% on a simple average basis, with a minimum reduction rate of
10% for each tariff line over a 10 year period (by the year 2004).

Since the domestic support implementation of Turkey
was well below the "de minimis level" no reduction commitment had been assumed
in this area.

For export subsidies, Turkey committed the value of
the export subsidies between 1986-1990 and 1991-92 would be reduced by 24% in the 10 year
period and the quantity of subsidized exports by 14% over the same period.

Anti-Dumping and Subsidies

Turkey revised her existing legislation on subsidies
and countervailing measures and anti-dumping measures in conformity with the new rules and
disciplines. Furthermore, Turkey also revised her incentive system in compliance with the
Agreement on Subsidies and Countervailing Measures (see Chapter II(2)(iii)).

Technical Barriers to Trade

The Agreement on Technical Barriers to Trade of the
WTO has been implemented in Turkey since 1 January 1995. In this line, TBT Enquiry Point
has been set up in Turkey.

On the other hand, as a result of the Customs Union,
Turkey has integrated its legislation into the legislation of European Union concerning
the removal of technical barriers to trade (See Box II.2).

Investment Measures

Trade and Investment liberalization has gained
weight in the globalizing world economy in the last decades. In this line, Turkey
attributed considerable importance to the foreign investment and pursued liberal foreign
policies since 1980s. "The Law Concerning the Encouragement of Foreign
Capital" provides foreign capital the same rights and obligations as the domestic
capital and guarantees the transfer of profits, fees and royalties and the repatriation of
capital in the event of liquidation or sale.

In this context, Turkey has faced no difficulty to
harmonize its legislation with the new rules set forth in the Trade Related Investment
Measures (TRIMs) Agreement.

Services

Turkey recognizes the growing importance of trade in
services for the growth and development of the world economy and believes that by the
effective application of GATS, the efficiency and competitiveness of the services sectors
of the developing countries will increase and the expansion of the services exports of
them will also be achieved.

Turkey actively participated in the Uruguay Round
services negotiations and the negotiations taken place after the Round, such as
negotiations on telecommunication and financial services. For the time being,
Turkeys schedule of commitments covers most of the services listed in "Services
Sectoral Classification List" (MTN.GNS/W/120) and has the same liberalization level
as in the schedules provided by most of the developed countries.

Intellectual Property Rights

It is important to note that intellectual property
protection is one of the core factors to ensure fair competition in global economy. Thus,
Turkey has made considerable progress towards updating and harmonizing its legislation
with universally acclaimed principles. In this context, Turkey attaches great importance
to the full implementation of the TRIPS Agreement.

Although having totally five year transition period
until the year 2000, Turkey has adopted her national industrial and intellectual property
legislation for patents, trademarks, industrial designs and geographical indications in
June 1995. All elements of this legislation are not only compatible with TRIPS standards
but also contain much better and more effective provisions. This progress shows that
Turkey is the first developing country that amended her national legislation according to
TRIPS Agreement.

Considering the coverage and age of the previous
legislation, the progress made especially in the field of industrial property protection
can be called as revolution. In this regard, Turkey has established a special government
authority having administrative and financial autonomy named Turkish Patent Institute for
administration of Industrial Property Rights and to establish an efficient and
contemporary industrial property system with the Decree Law 544 on 24 June 1994.

Enforcement of Intellectual Property Rights

The Commercial Courts and General Civil Courts have
been given the material jurisdiction on civil infringement actions. The complaint of the
right owner is a requirement to bring a criminal action. The Court has the power to grant
injunctions for cessation and prevention of the infringing acts, and for the provisional
seizure of the infringing goods and devices.

Accession Negotiations

Liberalized international trading system based on
clear and transparent principles of free and fair competition will contribute to the
improvement of the global welfare. Therefore, WTO membership constitutes an important step
for the countries willing to integrate to the world economic system.

In this framework, Turkey has constantly been
supporting especially the countries of BSEC and ECO to become WTO members sharing her
experience, including necessary legislation directed to promotion and liberalization of
trade with all countries in accordance with the WTO rules and disciplines.

Preferential Treatment for the LLCDs

Being aware of the importance of integrating the
least-developed countries to the world economic system and preventing their
marginalization, Turkey supported the initiatives launched within the framework of High
Level Meeting for the LLCDs held in Geneva on 27-28 October 1997 in line with the
relevant provisions of the Singapore Ministerial Declaration. Within this context, Turkey
assumed to grant additional tariff preferences to the export products of these countries.

The list including the products subject to
preferential treatment was promulgated in the Official Gazette and put into effect under
the Import Regime of Turkey as effective of 1 January 1998.

This unilateral preferential treatment envisages 556
products originating in the least developed countries to be imported into Turkey as
duty-free, except two products.

Customs Union

In 1963, the Treaty of Ankara, which envisages the
eligibility of Turkey to become a full member of the EC was concluded. The Treaty provided
for several stages in order to enable Turkey to prepare itself for full membership.

Turkish-EU relations culminated in 1996 with the
establishment of the Customs Union which is the most important development affecting
Turkish economy since the adoption of liberalization measures by the 1980s. The framework
of the Customs Union was drawn by the Additional Protocol to the Ankara Agreement signed
in 1970. After a transition stage of 22 years, the parties established the Customs Union
as of 1 January 1996, in accordance with the provisions of the Turkey-EU Customs Union
Decision No. 1/95 (CUD) (WT/REG22/1).

Customs Union constitutes an advanced form of
integration with its far-reaching perspective and comprehensive context covering a wide
range of policies. It should be borne in mind that Turkey is the first and only country to
enter into such an advanced form of economic integration without being a full member. As
it is a unique case for the EU, there are several issues other than tariff reductions
where Turkey and the EU agree to cooperate.

In this regard, apart from the elimination of
customs duties on EU imports and the adoption of the common customs tariff for imports
from third countries, the Customs Union Decision necessitates of a wide range of
legislation covering all aspects of trade, participation in several conventions on
intellectual, industrial and commercial property rights and harmonization to the technical
standards of the EU.

The Customs Union initially covers industrial and
processed agricultural products. Traditional agricultural products will be included in the
Customs Union following Turkeys adaptation to the Communitys Common
Agricultural Policy.

In this context:

- Turkey eliminated all customs duties and charges
having equivalent effect applied to imports of industrial products from the EU;

- Turkey started to apply the Communitys
Common Customs Tariff (CCT) for imports from third countries with the exception of a
limited number of products listed in Turkey-EU Association Council Decision No. 2/95
(WT/REG22/2) for which Turkey may retain customs duties higher than the Common Customs
Tariff for further 5 years;

- Turkey and the EU established a system for
processed agricultural products, in which parties differentiate between the agricultural
and industrial components, for the duties applicable to those products and abolished the
duties for the industrial component.

- Consequently, as of 1 January 1996, free
circulation of goods between Turkey and the EU has been established. The following
products can benefit from free circulation:

(a) Goods produced in the EU or in Turkey, including
those obtained from third country products in free circulation in the EU or Turkey;

(b) Third country goods which are in free
circulation in the EU or in Turkey;

(c) Goods obtained in the EU or in Turkey and
incorporating third country products not in free circulation in the EU or in Turkey,
provided that import formalities in respect of the third country components are completed
in the exporting country and the relevant customs duties or taxes having equivalent effect
collected.

- Turkeys weighted average rates of protection
through customs duties including Mass Housing Fund Levy on industrial imports from the EU
and EFTA countries dropped from approximately 10 % to 0. For products imported from the
third countries, these rates declined from approximately 15% to 5.6%. It is projected that
when reductions are made under the Uruguay Round commitments, Turkeys average rates
will be lowered to 3. 5% by the year 2001.

Adaptation to the EUs Common Commercial and
Competition Policies

Developments in the world trade as well as the
present degree of integration in Europe changed the previous definition of the Turkey-EU
Customs Union in a broader context so as to include implementation of identical commercial
and competition rules applicable to both in bilateral trade and in trade with third
countries. In order to prevent trade diversion and facilitate proper functioning of the
Customs Union, Decision No. 1/95 obliges Turkey to adopt EUs Common Commercial and
Competition Policies.

In accordance with the relevant provisions of the
Customs Union Decision, Turkey adopted measures which are substantially similar to those
of the Communitys commercial policy in the following fields (see Table I):

- Common rules for imports,

- Administration of quotas,

- Protection against dumped or subsidized imports,

- New Commercial Policy Instrument,

- Common rules for imports from certain third
countries,

- Common rules on textile imports,

- Common rules for exports,

- Officially supported export credits,

- Autonomous arrangements on textile imports,

- Standardization on foreign trade,

- Preferential regime of the Community,

- Inward processing regime,

- Outward processing regime.

Textiles and Clothing

One of the most important aspects of the Customs
Union between Turkey and the European Union is the Turkeys adoption of the EUs
textiles and clothing restraints included in the Common Commercial Policy measures, in
conformity with the Article XXIV of GATT 1994. The quantitative restrictions and
surveillance measures applied by the EU on some textiles and clothing products originating
in certain third countries are the integral part of this Policy.

Article 12 of the Decision No. 1/95 of the
Turkey-EEC Association Council concerning the textile products, stipulates that:

"In conformity with the requirements of Article
XXIV of the GATT, Turkey will apply as from the date of entry into force of this Decision,
substantially the same commercial policy as the Community in the textile sector including
the agreements or arrangements on trade in textile and clothing."

In this context, after inviting countries concerned
to enter into consultations, as of 1 January 1996, all restrictions and surveillance
measures were put into force and Turkey started to apply exactly the same measures against
52 countries, as of those of the EU.

Unless these measures had been put into force by
Turkey, trade diversion would have occurred between the Parties and this could have
prevented the proper functioning of the Customs Union. Turkey is continuously making
necessary changes in the measures regarding the imports of textile and clothing products
in line with the changes in the European Union's textile policy. At the beginning of the
1998, quantitative restrictions on textile products originating in Central and Eastern
European Countries and some Mediterranean countries were abolished, in parallel to the
EUs implementation.

In order to control textile and clothing imports
originating in the countries concerned under double checking system, it is necessary to
have agreements for administrative arrangements. Until now, Memorandum of Understandings
(MOU) have been initialed or signed with 24 countries, including important suppliers for
the Turkish market; such as Pakistan, Malaysia, China, South Korea and Indonesia.

By these agreements, the quota levels are determined
bilaterally and the control of the trade flow is given to the authorities of the exporting
countries through the issuance of the export licenses.

These arrangements are based on the provisions of
the agreements on trade in textile products between the European Union and the related
countries. MOUs contain similar provisions on rules of origin, classification of goods,
import and export procedures, inward processing and outward processing trade.

Since the trade volume of the previous years and the
trade potential between the Parties were fully taken into account in determining the
levels of the quantitative restrictions, either the conclusion of the Memorandum of
Understandings or the restraints applied without an agreement do not negatively affect
traditional trade flows between the Parties. On the other hand, the surveillance measures,
which aim only to follow the trade statistics do not foresee any quantitative
restrictions.

In the single checking system, the quotas are
distributed among importers in accordance with the past performance criteria by the
Undersecretariat of Foreign Trade. For the new importers in the market, a share is also
provided on the first come-first served basis.

All these measures and the latest developments with
respect to the abolishment of the restraints were already notified to the appropriate WTO
bodies.

Approximation of the Turkish legislation to the
Common Competition Policy of the EU

A great progress is achieved with entry into force
of the laws on protection of competition and protection of consumers, as well as Laws on
patents, copyrights, trade marks and industrial designs, ensuring the internationally
recognized norms of competition in Turkey (see Table II).

A Decree on state aids compatible with the system in
force in the EU and the relevant provisions of the WTO Agreement subsidies and
countervailing duties has entered into force. This Decree limits the scope of state aid to
research and development, protection of environment, market research and promotion
activities abroad.

"Law on the Protection of Competition"
entered into force in December 1994. The Constitution has already, by virtue of its
Article 167/1, put the state authorities under the obligation to take measures to ensure
and promote sound, orderly functioning of markets and to prevent the formation, in
practice or by agreement of monopolies and cartels. For this reason, adoption of the new
competition code has been an important step not only for the achievement of a stipulation
of the Customs Union but also for the fulfilment of the above-mentioned constitutional
order.

The Competition Code provides a general prohibition
of competition-restricting practices and indicates examples of prohibited agreements; it
also contains a general prohibition for abuses of dominant position, and finally regulates
merger control. In 1997, the Board of Competition has been established to enforce the
Competition Law.

Pan-European Cumulation System

Turkey will be a part of the Pan-European Cumulation
System starting from 1 January 1999, which facilitates the free flow of trade without
origin barriers between the EU, EFTA and Central and Eastern European Countries. The
system enables the Parties to benefit from production facilities all over the Europe and
provide them with cheaper production possibilities.

ECSC products

The Customs Union is reinforced with a free trade
agreement signed on 26 July 1996 on products covered by the European Coal and Steel
Community. Since the entry into force on 1 August 1996 (WT/REG 22/1/ Add.1), EU has
removed immediately all the tariffs on ECSC products of Turkish origin.

On the other hand, with an exception of 142 items,
which include long steel and alloy steel products, tariffs are removed immediately on all
ECSC products of the EU origin by Turkey too. The above mentioned 142 items are subject to
a transitional period of 3 years, for which tariffs will be reduced gradually and shall be
totally eliminated by the end of 1998.

Basic Agricultural Products

For basic agricultural products Turkey and the EU
have agreed to develop the existing preferential trade regime in agricultural sector so as
to allow Turkey to adapt its agricultural policy to that of the EC. In that respect,
consecutive negotiations on better market access possibilities for agricultural products
have been held between the parties within the period of 1993-97.

As a result of these negotiations, Turkey acquired
concessions as tariff quotas and/or duty reductions in a number of products namely tomato
paste, poultry meat, sheep and goat meat, olive oil, cheese, certain fresh fruits and
vegetables, hazelnuts, fruit juices, marmalade and jams on a product/product group basis.

In that respect, concessions have been granted to
the Community side on live bovine animals, frozen meat, butter, cheese, seeds of vegetable
and flower, flower bulbs, apples, peaches, potato, cereals, refined or raw vegetable oil,
sugar, tomato paste, some alcoholic beverages and animal feedstuff.

In this framework, the Protocol texts and the
concession lists have been initialed, and the related Decree concerning the above
mentioned concessions was published in the TR Official Gazette No. 23225 of 9 January
1998. Following the entry into force as of 1 January 1998 of the Turkey-EU Association
Council Decision No. 1/98 regarding the reciprocal concessions, the relevant Communiqué
was published in May 1998.

Free Trade Agreements

According to the Article 16 of the Association
Council Decision establishing the Customs Union, Turkey shall align itself progressively
with the preferential customs regime of the EU, which rests on the sets of autonomous
regimes and preferential agreements, within five years starting from 1 January 1996.
Article 16 of the Association Council Decision No:1/95 and its Annex 10 set the rules and
modalities of the alignment and also provide that Turkey will take the necessary measures
and negotiate agreements on a mutually advantageous basis with the countries concerned.
Turkey gives priority to the adaptation of preferential agreements concluded between the
EU and the third countries in which reciprocal trade provisions have been sought. Within
the context of the Association Council Decision, Turkey stated that the priority will be
given to the following preferential agreements: Israel, Hungary, Bulgaria, Poland,
Romania, Slovakia, Czech Republic, Estonia, Latvia, Lithuania, Morocco, Tunisia, and
Egypt.

In this respect, the Free Trade Agreement (FTA)
between Turkey and the EFTA States which was signed in 1991 was the first step on the way
to the adoption of the preferential regimes of the EU. Turkey concluded FTA Agreements
with Israel in March 1996, with Hungary in January 1997, with Romania in April 1997, with
Lithuania and Estonia in June 1997, with the Czech and the Slovak Republics in July 1997,
with Slovenia in May 1998, with Latvia in June 1998 and finally with Bulgaria in July
1998.

Free Trade Agreements entered into force on 1 May
1997 with Israel, on 1 February 1998 with Romania, on 1 March 1998 with Lithuania and on 1
April 1998 with Hungary. The FTAs with Czech and Slovak Republics and Estonia were
ratified by the National Assembly and will be put into force before the end of 1998.

On the other hand, FTA negotiations still continue
with Poland, and exploratory talks will be initiated with Tunisia, Morocco, Egypt, Malta,
and Palestine.

General objectives of these Free Trade Agreements
are to align with the EUs Preferential Trade

Policy, to establish free trade area between the
parties through gradual reduction of trade barriers, to increase the trade volume between
the parties, to improve the parties competitiveness with cheaper inputs from the
other party, to create joint investment possibilities in and out of European markets and
to improve cooperation among the parties businessmen.

Functioning of the Customs Union

The Customs Union expanded trade between Turkey and
the EU in 1996 and this trend continued in 1997. Although the EU exports to Turkey
expanded significantly and Turkeys trade deficit with the EU doubled from $5 billion
to $10 billion, Turkish industries have managed to adjust themselves to the new
competitive environment without excessive damage in most cases. Turkeys entry into
customs union with the EU without receiving economic and financial assistance indicates
the resilience of the Turkish economy and its leading industries.

In the first year of the Customs Union, the EU
exports to Turkey rose sharply while Turkeys exports to the EU have been stagnating.
The figures for 1996 indicate a slight increase of 4.2 % for Turkish exports as compared
to the previous year, whereas Turkish imports showed an extraordinary increase of 37.2%
during the same period. Similarly, the share of the EU in Turkeys total exports
which was 51.2 % in 1995 was reduced to 49.7 % in 1996 and to 46.7 % in 1997. Meanwhile,
the share of the EU in Turkeys imports shifted from 47.2 % to 53 % in 1996 and to
51.2 in 1997. Turkeys main partners in the EU were Germany, Italy, UK and France.

In 1996, Turkeys total exports and imports
were 23.2 billion dollars and 43.6 billion dollars respectively which, in turn, correspond
to a trade deficit of 20.4 billion dollars. 11.6 billion dollars of this deficit was with
the member countries of the EU. In 1997, Turkeys total exports were 26.2 billion
dollars while its imports were 48.5 billion dollars.

Even though a portion of this trend is attributable
to overheating of the Turkish economy in 1996 and to heavy investment in machinery, it
seems that the EU exporters are enjoying the benefits of the Customs Union far beyond the
initial expectations. The moderate increase in Turkeys exports to the EU during 1996
and 1997 was far below of any anticipation.

BILATERAL RELATIONS

North America

U.S.A.

By the significant increase in the volume of trade
between Turkey and the U.S.A. over the last decade, Turkish imports from the U.S.A.
reached approximately U.S Dollars 4 billion in 1997, while Turkish exports to the U.S.A.
were of U.S. Dollars 2 billion in the same year. The bilateral trade figures indicate a
sizable trade deficit against Turkey.

The U.S.A. has been applying quantitative
restrictions on a large range of textiles and clothing categories imported from Turkey
under the Multi-Fibre Arrangement (MFA) since 1984, and under the World Trade Organization
Agreement on Textiles and Clothing (ATC) since 1995. The U.S.A. imposes countervailing
duties on steel tubes and non-egg dry pasta imports of Turkish origin. In addition,
antidumping duties have been put into effect by the U.S. on Turkish exports of non-egg dry
pasta and rebar exports.

Canada

The bilateral trade between Turkey and Canada has
shown an increasing trend in the last five years period. In 1997, Turkeys
imports from Canada were registered as U.S. Dollars 311 million, and Turkeys exports
to Canada were realized as U.S. Dollars 117 million. The trade deficit against Turkey
reached U.S. Dollars 194 million. Canada applies quantitative restrictions on some
textiles and clothing products imported from Turkey.

Commonwealth of Independent States (CIS)

After dissolution of the Soviet Union, a new market
for the Turkish exports has appeared which also brought about a great opportunity to
Turkey regarding the supply of its basic needs of economy. For that reason, the trade
volume with C.I.S. increased on the annual average rate of 30.2% during the period of
1992-1997 from U.S Dollars 1.9 billion to U.S. Dollars 7.1 billion in 1997.

The main trade partner in this group is the Russian
Federation, representing a share of 59 % in total. In 1997 the Turkish exports to Russia
is U.S. Dollars 2.1 billion and imports from Russia is U.S. Dollars 2.2 billion reaching
the trade volume of U.S. Dollars 4,2 billion. Besides these figures, the shuttle trade
which is estimated approximately 5-6 billion US$, brings Russia to the top position in
Turkish foreign trade. It is certain that as the new natural gas pipeline projects
foreseeing the delivery of the Russian gas to Turkey in coming years are realised,
bilateral trade will rise sharply.

Balkans

Since 1992, trade with Balkan countries has been
increasing. It reached to U.S Dollars 1.7 billion in 1997 indicating an annual average
increase of 16.8 %. In this region, Romania and Bulgaria are the main partners of Turkey
and it is very likely that the trade volume will rise accordingly as the free trade
agreements with those are put into force.

Central European and Baltic States

Turkey gives special importance to the development
of trade and economic relations with these countries. The trade volume has risen to U.S.
Dollars 814 million in 1997 from U.S. Dollars 633 million in 1992.

In addition, finalisation of the free trade
agreements with Hungary, Czech Republic, Slovakia and all the Baltic States will surely
contribute to the bilateral trade relations.

Middle East Countries

Turkeys exports to the Middle East Countries
realised as U.S. Dollars 2.68 billion (10.2% of total) in 1997, while imports from these
countries stood at U.S. Dollars 3.12 billion.

Turkeys main export items to the countries in
this region are iron and steel products, foodstuff, textile products and machinery
products. On the other hand, imports from the region is concentrated on crude oil and
petroleum products.

Compared with 1980s, it is observed that the
volume of trade between Turkey and the Middle East Countries has decreased in 1990s.
Main reasons of this can be summarised as the embargo imposed on Iraq by the UN, negative
effects of the Gulf Crisis, falling of the world crude oil prices.

However, taking into consideration the alleviating
of the embargo imposed on Iraq, middle east peace process, Turkeys increasing energy
demand and liberalisation activities in the region, bilateral trade is expected to
increase in coming years.

Asia

The rise in the share of Asian in world trade also
stimulates Turkeys trade relations with them. The total trade which had been
approximately U.S. Dollars 3.7 billion in 1992 reached to U.S. Dollars 7.7 billion in 1997
with an increase of 108%. While Singapore, Hong Kong and Japan hold the lead in
Turkeys exports to the region, Japan is the main source of imports.

In the last decade, Turkish exports to Japan has
shown a decreasing trend, while Turkish imports from Japan has increased sharply. In 1997,
Turkeys imports from Japan were realized as U.S. Dollars 2.04 billion and Turkish
exports to Japan were registered as U.S. Dollars 144 million. Thus, the trade deficit
against Turkey reached U.S. Dollars 1.9 billion in the same year.

Turkeys imports from China have been
increasing steadily since 1992 (U.S. Dollars 539 million, U.S. Dollars 556,5 million and
U.S. Dollars 787.5 million in 1995, 1996 and 1997 respectively), whereas its exports to
this country that reached its peak in 1993 with U.S. Dollars 512 million, displayed sharp
decreases in 1994 and 1995 resulting in U.S. Dollars 355 million and U.S. Dollars 67
million respectively. By 1997, Turkish exports to China have been realized as U.S. Dollars
44.4 million.

Within this context, taking into account the great
potential of China, Turkish Government has embarked on a comprehensive program aiming at
increasing Turkeys exports to China and overcoming the huge trade deficit against
Turkey.

Besides, with the aim to diversify the orientation
of Turkish exports in Asia-Pacific region, Turkey has been trying to establish
comprehensive commercial and economic relations with countries in the region like Vietnam,
a country which owns a great potential.

Central Asia and Caucasus

Turkeys trade relations have been increasing
with Newly Independent States of Central Asia (Kazakhstan, Kyrgyzstan, Tajikistan,
Turkmenistan and Uzbekistan) and of Caucasus (Azerbaijan and Georgia). Total exports of
Turkey to these countries were U.S. Dollars 196 million in 1992 and reached U.S. Dollars
1.081 million in 1997, Turkeys imports realized as U.S. Dollars 95 million and U.S.
Dollars 465 million respectively for the same years.

Turkeys main export commodities in 1997 to the
countries in the region are foodstuffs (U.S Dollars 330 million, 30.5% of the total),
machines (U.S. Dollars 110 million, 10.1% of the total), textile products (U.S. Dollars
101 million, 9,3% of the total) and chemical industry products (U.S. Dollars 93 million,
8.6% of the total).

The composition of Turkeys imports from the
region depends on the natural resources of each country, in 1997 non-ferrous metals
comprised 60% and iron-steel 30% of Turkeys total imports from Kazakhstan; cotton
80% of Turkeys total imports from Uzbekistan; cotton 65% of Turkeys total
imports from Turkmenistan; cotton 26% and leather 24% of Turkeys total imports from
Azerbaijan; iron-steel 30% of Turkeys total imports from Georgia and cotton 35% and
leather 30% of Turkeys total imports from Kyrgyzstan.

REGIONAL TRADE ARRANGEMENTS AND COMCEC

Economic Cooperation Organization (ECO)

The Economic Cooperation Organization (ECO) was
established in 1985 as a trilateral organization among Iran, Pakistan and Turkey to
promote regional cooperation. Its aim and work procedures are identical with those of its
forerunner, the Regional Cooperation for Development (RCD), which had remained in
existence from 1964 to 1979.

The ECO covers vast areas of cooperation in the
fields of economic and infrastructure development, agriculture, science, education,
culture, public works and the transfer of technology.

In February 1992, the ECO was expanded to include
those six Central Asian republics, as well as Afghanistan. With the adhesion of these
countries ECO became a major regional organization encompassing an area of 7 million sq.
kilometres, inhabited by nearly 300 million people.

There are many ongoing projects aiming for the
promotion of trade and economic cooperation among the member countries of ECO;

- ECO Trade and Development Bank

- ECO Reinsurance Company

- ECO Shipping Company

- ECO Air Company

- ECO Science Foundation

- ECO Cultural Institute

- Agreement on Simplification of VISA Procedures for
Businessmen of ECO Countries

- ECO Transit Trade Agreement

- The Protocol on Preferential Tariffs Among ECO
Members

The Black Sea Economic Cooperation (BSEC)

The Black Sea Economic Cooperation (BSEC) project is
a regional economic co-operation arrangement, established on 25 June 1992 by 11 states
Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, the Russian
Federation, Turkey and Ukraine covering a vast economic area from the Adriatic to the
Pacific with a total population of 325 million. The member states signed the "Charter
of the Organization of the Black Sea Economic Cooperation" on June 1998 in Yalta,
which transforms the Cooperation into a Regional Economic Cooperation.

The main objective of the Cooperation is to develop
and diversify existing economic relations among its members by making efficient use of the
advantages arising from their geographical proximity, their traditional ties, the
complementary nature of their economies and large economic space and market.

The establishment of a BSEC Free Trade Area covering
the BSEC region and further integrating its member countries into the New European
Architecture has been a major goal since the very inception of the BSEC.

In this context, the BSEC Special meeting with the
participation of the Ministers responsible for Economic Affairs on 7 February 1997 in
Istanbul adopted the Declaration Of Intent For The Establishment Of The BSEC Free Trade
Area.

The project of the BSEC Free Trade Area is not only
important for the direct economic benefits to be acquired by the member countries
(increased intra-regional trade, increased foreign investment, increased efficiency among
the productive sectors of the BSEC countries) but also as the step that will prepare BSEC
to become an integral part in a larger European economic space.

Taking into account the legal commitments of some
BSEC member states with the EU and the aspirations of the majority of them to become full
members, it is clear that any effort to create a BSEC FTA will be possible only through
extensive discussions between BSEC and the EU.

Standing Committee For Economic and Commercial
Cooperation (COMCEC)

COMCEC is one of the three standing Committees
established by the Third Islamic Summit Conference held in Mecca and Taif in 1981. Since
its First Session in November 1984, COMCEC adopted the document entitled "Action Plan
to Strengthen Economic Cooperation among member States", as the basic starting point
of its activities approved at the Third Islamic Summit and comprising suggestions for the
development of cooperation in the different fields of activity. A new Action Plan was
adopted by the COMCEC in 1994, updating the Action Plan adopted in 1981.

The new strategy handles economic cooperation among
the member countries with an approach different from that of the previous period. Under
this different approach, the principle of "collective self-sufficiency" is
replaced by the concept of integration with the world economy, and in this connection, the
importance of economic liberalization and the private sector is stressed. One new element
of the strategy, with a view to carry on cooperation within a more realistic and flexible
structure, is to have voluntary participation and to form regional sub-groups among
countries with common interests, for cooperation.

FUTURE DIRECTION OF TURKEY'S FOREIGN TRADE

Since the structural adjustment program of 1980,
Turkey has been pursuing liberal economic and trade policies with the objective of
establishing a free market economy and integrating with the world economic system.

Undoubtedly, Turkey will continue to pursue liberal
economic and trade policies based on the principles of free and fair competition,
non-discrimination and elimination of technical barriers.

In this context, Turkeys foreign trade policy
will be conducted in compliance with its commitments arising from the WTO and the customs
union with the EU. The customs union is the most comprehensive and far reaching element
that contributes to strengthening Turkeys expanding role in the world economic
system. However, emphasis must be given to the fact that the customs union could not be
regarded as the ultimate stage in Turkish-EU relations, rather it should be completed by
full membership.

Turkey, committed to the expansion of world trade,
will further strengthen its bilateral relations with all countries, including those which
are not yet integrated into the multilateral trading system established under the WTO
system.

Considering their positive overall impact on
international trade as well as on the multilateral trading system and its regulatory
framework, regional integration arrangements will also be the key elements in
Turkeys future agenda.

Table I

Adaptation of common commercial policy
instruments of the EU

AREA

EU LEGISLATION

CORRESPONDING
LEGISLATION ENACTED BY TURKEY

Common Rules for Imports

Council Reg. (EC) No.
3285/94

Decree No. 95/6814 on
Surveillance and Safeguard Measures for Imports and the Administration of Quotas and
Tariff Quotas, and Implementing Regulation on Surveillance and Safeguard Measures for
Imports (Official Gazette dated June 1, 1995, 22300).

Decree No. 95/6814 on
Surveillance and Safeguard Measures for Imports and the Administration of Quotas and
Tariff Quotas, and Implementing Regulation on Surveillance and Safeguard Measures for
Imports (Official Gazette dated June 1, 1995, 22300).

Decree No.
95/6816 and Implementing Regulation on Surveillance and Safeguard Measures on Importation
of Textile Products from Certain Third Countries Not Covered by Bilateral Agreements,
Protocols or Other Arrangements, or by Other Specific Import Rules (Official Gazette dated
June 1, 1995, 22300)

Law No. 97/9090 on Appointment of the Competition Board
(Official Gazette 22918, dated February 27, 1997)

State Aid

Rome Treaty

Articles 92-94

Turkey has two years in
order to adopt the related provisions of the EU legislation, with the exception of
textiles sector in which Turkey has accepted the harmonization before the entry into force
of the Decision No.1/95. In this context, Decree No. 94/6401 Concerning State Aid on
Exports was issued in 1995. (Official Gazette dated January 11, 1995)

A Declaration was given to Commission regarding the state
aids to the textiles sector in September 1995. This Declaration was accepted by the
European Commission. In accordance with its commitment, Turkey has adopted the state aid
programs of the EU in this sector from 1.1.1996 onwards.

The Protection of
Intellectual, Industrial and Commercial Property Rights

Decree No.97/9731 on adoption to the
"Protocol Relating to the Madrid Agreement Concerning the International Registration
of Marks", "Locarno Agreement Establishing an International Classification for
Industrial Designs" and "Budapest Treaty on the International Recognition of the
Deposit of Microorganisms for the purposes of Patent Procedure". (Official Gazette
dated August 22, 1997, 23088)

The Protection of
Consumers

Law No. 4077 on the
Protection of Consumers (Official Gazette dated March 8, 1995, 22221)